The cost of renting is set to become cheaper than that of a mortgage for the first time in 14 years which could signal ‘trouble ahead’ for the housing market, according to new analysis.
The average monthly cost of a mortgage will exceed the price of rent at the start of next year, according to research by Capital Economics.
The last time this was the case was between 2004 and 2008. It was also the case in the late 1970s and 1980s, shortly before recessions bit in Britain.
The average monthly repayment on a 20 per cent deposit mortgage is currently £870, it said – but this is forecast to rise to more than £1,000 for new mortgages by the beginning of 2023.
Buyers’ remorse? Average repayments on new mortgages taken out in 2023 are set to be higher than average rents, according to a study by Capital Economics
At the same time it predicted that rents would increase much slower, from £935 per month today to around £980 at the beginning of next year.
This, Capital Economics’ analysts said, was because of increasing house prices and rising mortgage rates.
Last week, Nationwide reported that the average home was worth 21 per cent more than it was in February 2020, now coming in at £265,000.
This means people have been taking out larger loans to buy a home. According to the latest Bank of England statistics, the average mortgage was £235,474 in February 2022 – up 10.4 per cent since the same time last year, and 4.6 per cent compared to January 2022.
Meanwhile, mortgage rates have been increasing since the end of 2021 as the Bank of England has hiked its base rate, which impacts the cost of lending, three times since December.
The average interest rate on a two-year fixed deal with a 40 per cent deposit climbed by 1 per cent between October 2021 and March 2022, according to analysis by broker L&C Mortgages.
Counting the cost: Average rents are set to hit around £980 per month at the start of next year, according to Capital Economics – but the typical mortgage payment could exceed £1,000
In line with this, average payments on new mortgages have risen by more than £800 a year.
Mortgage payments are usually cheaper than rents, and in real terms house prices have risen by 140 per cent since 1980, according to Capital Economics, resulting in large capital gains for buyers.
While buying a home comes with additional expenditure such as legal fees and stamp duty, the report said it was still often preferable to renting because it allowed households to build their wealth by increasing their equity in the property with each mortgage payment, whereas renting was a ‘pure cost’.
While renting could become cheaper than buying, the report said those with the financial resources to buy were still likely to do so because of the security and the potential to make money if the value of the home rose over time.
However, Capital Economics said first-time buyers could end up renting for longer before buying, which could reduce demand and therefore dampen the hot housing market.
The increasing cost of living could also see first-time buyers taking longer to save up the required deposit.
Previously, times when renting a home has been cheaper than buying have preceded periods of recession, for example in the late 1970s, the late 1980s and between 2004 and 2008.
‘When the monthly cost of buying has eclipsed that of renting in the past it has signalled trouble ahead, with prospective first-time buyers choosing to rent rather than buy, helping to cool demand,’ the report said.
‘With the financial benefits becoming less obvious, we are likely to see an increasing number of would-be buyers opting to rent for a bit longer, which is another good reason to expect buyer demand to ease this year, while rental demand remains strong.’
This could put even more pressure on renters trying to find a home.
They are currently facing record pressure when house hunting, with more than 28 prospective tenants for every available property according to Propertymark.
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